As the cryptocurrency world expands and gains popularity, traditional banks are reluctant to use digital assets, because they believe that their inherent risks outweigh their potential benefits. According to a study by the Association of Certified Anti-Money Laundering Specialists (ACAM) and the UK’s Royal United Services Institute, 63% of people working in the banking sector view cryptocurrency – payments as a risk rather than an opportunity. Cryptocurrencies managed by central banks also reduce the attractiveness of the asset, as banks do not believe they can penetrate the space.
Central banks fear losing control of the global payment system if cryptocurrencies are not controlled by a central authority but by a private company as is the case with DiEM. If cryptocurrencies become the dominant form of global payments, they could limit the ability of the central banks in smaller countries to determine monetary policy and to control the money supply. As trade shifts to stable coins and the widespread use of other cryptocurrencies and peer-to-peer networks, governments risk losing control of the monetary policies they use to rein in inflation and financial stability.
The visibility of cryptocurrencies with banks could help them fight criminal activities like fraud and money laundering, Brooks said, comparing the introduction of digital assets to the dawn of the Internet. Six banks have been able to use blockchain technology in cryptocurrencies and the way cryptocurrencies are regulated to allay concerns about criminal activity.
New cryptocurrencies and payment systems increase pressure on central banks to develop their own digital versions. Given that cryptocurrencies are designed to bypass the banking system, banks need creative ways to address and adapt to the technology to protect themselves from the risks it poses. Although most banks do not currently offer their customers cryptocurrency services, they must prepare for the potential security risks inherent in any new technology that is gaining popularity.
As cryptocurrencies become mainstream, pressure is mounting on some of the world’s largest central banks to push ahead with plans to issue digital cash to ward off threats from the private sector to traditional money. Central banks around the world, including the US Federal Reserve, are considering adopting their own digital currencies to compete against the crypto boom.
In July, the OCC allowed state-chartered banks in the United States to offer customers cryptocurrency custody services. According to the Crypto-Depository company Nydig, customers of US banks for the first time will be able to buy, hold and sell bitcoin in their existing accounts.
Several banks have said they are waiting for regulatory clarification before offering cryptocurrency custody services or introducing digital currencies. A survey of senior executives of banks and credit unions by Cornerstone Advisors found that eight out of ten financial institutions are interested in offering cryptocurrency investments to their customers, with only 2% saying they are currently interested. Among consumers who hold cryptocurrencies, 60% said they would use their bank if they offered them the opportunity to invest in cryptocurrencies, and 32% said they already do so.
Given that governments have a powerful new way to manage the economy through incentive payments and other benefits of lending to people, central banks “imprimatur could make CBDCs a safer digital asset. As mentioned above, this means that the OCC believes that banks should hold the cryptocurrency itself as the key to accessing cryptocurrencies, not their customers “personal digital wallets.
This suggests that a balance needs to be struck: banks need to do more to understand and embrace blockchain technology and cryptocurrencies, and the creators of new cryptocurrencies need to consider and appreciate the importance of traditional banking practices. Commercial banks should continue to hold our funds in traditional currencies, thereby lending to businesses, but transactions should be intermediate and separate from payment technology, at least in the eyes of the end consumer. This decreases the appeal of start-up circles like Ripple, which are turning away from cryptocurrencies and looking for ways to apply their technology to traditional currencies which are still connected to banks and central banks.
In recent years an increasing number of cryptocurrency companies applied to the Office of the Currency Comptroller (OCC) for a national bank charter. The OCC hopes regulatory requirements will help traditional banks warm to cryptocurrencies.
Vast said it would be the first government-chartered financial institution to acquire and offer digital asset custody services on behalf of customers and their bank accounts. In July the OCC issued an interpretative letter stating that national banks and the German Savings Banks Association would be authorized to provide customers with crypto-currency service, including the possession of unique encrypted keys associated with digital currencies. This form of digital money could be created by commercial banks on the basis of central bank money or loans in their accounts.
Stronger guidance from regulators is needed to reduce banks “reluctance to participate in cryptocurrency projects, Brian Brooks, acting currency watchdog, said in May. In order to manage the risks arising from the provision of cryptocurrency-related custodian services, banks must conduct due diligence from third-party providers before taking cryptocurrency issuers on board as bank customers, Brooks said.
Proponents of their own digital currency, the so-called central bank currencies, or CBDCs, promise speed and other benefits of the cryptocurrency without the associated risks. Central banks fear losing control over the supply of money and payment systems for cryptocurrencies such as Bitcoin and the proposed Facebook-backed cryptocurrency DiEM. What interests me most is whether central banks will embrace everything digital and launch cryptocurrencies.